Conspicuous Consumption and Inequality

Abstract

My research is centered around understanding consumption behavior and its relationship with inequality.

In Chapter 1, I study how consumption inequality in the United States has evolved over time, with a particular focus on distinguishing two major expenditure components: services and goods. I argue that such distinction is important to understand inequality between high and low income groups. I show that increases in consumption inequality over the period 1984-2018 were driven mostly by rising inequality in expenditure on services rather than goods. I further show that most of it was driven by increased inequality in young households expenditure in services, whereas older households have experienced no change in inequality of either good or service expenditures. As modern societies undergo the transformation into service societies, this research contributes to our understanding of the diverse effects of inequality and informs policy decisions to ensure that this transformation benefits all.

Chapter 2 proposes a canonical model of intertemporal choice in which both current and future conspicuous consumption can distort household consumption behavior. What makes our model tractable is that we assume that each consumer cares about the expected comparison of relative consumption, which provides a parsimonious characterization of positional concerns. We show that equilibrium consumption behavior is a function of the distribution of conspicuous consumption in an individual’s reference group as well as her own permanent income. In turn, the distribution of conspicuous consumption is a function of the distribution of permanent income. The relevant empirical implication is that an individual’s consumption, by itself, is no longer a valid proxy for the individual’s permanent income if relative consumption matters.

In Chapter 3, we document a robust effect of visible inequality on household expenditures in the United States over the period 2010–2018. To that end, we exploit variation in the cross-sectional distribution of visible consumption — expenditures in clothing, personal care, food away from home and vehicles — for younger and older households across regions of the United States and over time. We find that rising inequality in expenditure on visible goods within the different groups is associated with an increase in average spending on those same goods as well as an increase in total expenditures by the average household in the group. Our main findings are not likely to be a symptom of correlated differences in preferences across generations, selection effects across geographical locations, alternative sources of state-level variation over time, or measurement error. Rather, they most likely reflect actual distortions associated with consumption externalities. We conjecture that historically low interest rates and the rise of social media underlie our findings.